Buy Up Shares in Quest Software, Oracle Pass By

It's been a long time since a pure software company went public. But there are a handful of large software companies that spike their growth through acquisitions. Oracle (NASDAQ: ORCL) is the most well known of these -- but a less popular software acquirer -- Quest Software (NASDAQ: QSFT) could be a better stock buy.

Quest and Oracle sell software to companies. But companies view buying software as an expensive risk. That's because it is never possible for a business to download software and get an immediate boost in its financial performance that exceeds the software's cost.

Getting that payoff means changing the way the organization works. And that change means that management must take time away from other activities to manage the change process. Not only that, but new software often requires a company to hire consultants to help with the process. And almost always, the company needs help using the software after it's installed as well as upgrades to improve its performance.

So business software companies must be willing to invest in a long sales process to convince a company to buy their wares. And since companies started throttling back on IT spending after the dot-com crash, the number of software companies that can afford such a sales force has diminished.

And the survivors of this Darwinian process are scooping up these weaker competitors at bargain prices. Moreover, after paying those prices, companies like Oracle and Quest can lop off the sales forces and other un-needed people to make their acquisitions pay off even faster.

On November 3, Quest is expected to report an increase in profit compared to 2010. Specifically, analysts are looking for EPS of $0.36 a share on sales of $214.7 million. This represents a four cents a share increase in EPS and an 11% sales increase.

Meanwhile, Oracle keeps on acquiring. On Wednesday, Oracle announced it would pay $1.43 billion to buy a so-called cloud-based customer service computing provider, RightNow Technologies.

And its earnings have been doing nicely. In its September 20th report on its fiscal first-quarter earnings, Oracle beat by a penny expectations for adjusted EPS of $0.47. And its sales rose 12% to $8.37 billion -- as analysts had expected.

At the core of Oracle's success is its acquisition of Sun Microsystems a few years ago. Companies are now buying Sun hardware and operating systems as they grow and are also buying Oracle software to boost computing performance. Oracle sells these packages -- dubbed Exadata and Exalogic, that combine Sun's Sparc chips and Solaris operating system with Oracle software.

Should you invest in both of these winners? Skip Oracle and consider Quest. Here's why: 

• Quest Software: Good growth, decent margins; cheap stock. Revenue for Quest have increased 10.3% in the past 12 months to $801 million while net income climbed 40.1% to $75.5 million – yielding a 9.4% net profit margin. Its PEG of 0.65 (where a PEG of 1.0 is considered fairly priced) is cheap on a P/E of 23.14 and expected earnings growth of 35.8% to $1.43 in 2012.
• Oracle: Healthy growth, strong margins; expensive stock. Oracle's sales have climbed 32.8% in the past 12 months to $36.5 billion while net income jumped 39.3% to $9.04 billion – yielding a 24.8% net profit margin. Its PEG of 1.99 is expensive on a P/E of 19.46 and expected earnings growth of 9.74% to $2.56 in fiscal 2013.

Their relative valuations suggest that investors are on to the Oracle story -- but if Quest achieves the 2012 results that investors expect, they could enjoy a pleasant upward journey.

Moody's, McGraw Hill Still Don't Rate

Remember the financial crisis? That was way back in 2008 when all that AAA-rated sub-prime mortgage backed debt turned out not to be worth as much as the ratings suggested. For that, we can tip our hats, in part, to Moody's (NYSE: MCO) and McGraw Hill (NYSE: MHP).

But recently, these paragons of corporate virtue are trying to boost their image. So they're getting tough. Most recently, in August McGraw-Hill's S&P decided to downgrade the U.S.'s credit rating. A move that had exactly the opposite effect as had been intended -- investors scrambled to buy the U.S. 10 year bond, driving its interest rate down 35%.

Before delving into their recent performance, it's worth thinking a moment about why a tip of the hat is due to the ratings agencies. Contrary to the popular refrain in 2008, there were plenty of people who saw disaster coming before the financial crisis. In December 2006, I recommended betting on a drop in the price of a big sub-prime mortgage lender, NovaStar (PK: NOVS) -- its stock has since lost 99.7% of its value -- plunging from $106 to $0.36.

And without ratings agencies, NovaStar and its peers would never have grown as much as they did. How so? As I wrote in August 2007, the rating agencies wrapped that financial toxic waste in gold. Moody's and S&P used data supplied by the investment banks that pooled sub-prime mortgages to compete with each other to win lucrative ratings business from those banks.

The winner of some $3 billion in ratings business for this toxic waste was the agency willing to supply a AAA rating on the increasingly low quality pools of mortgages so investors around the world would be cleared to buy them. And as good quality borrowers had all taken on as much debt as they could, the lower quality loans supplied by the likes of NovaStar were the only thing left to fill the pipeline.

Thursday, Moody's reported on how it's been doing in the wake of this disaster -- and it put in a mixed performance. It was expected to report EPS of 49 cents down 15% from the year before on $542.8 million in revenue, up 5.7%. Its actual revenue was $531.3 million for the quarter -- 2.2% below expectations and its EPS of 57 cents beat expectations by over 16%.

And Moody's gave an upbeat outlook -- its CEO noted, "we are reaffirming our 2011 EPS guidance of $2.38 to $2.48 and we expect to be at the upper end of the range."

Meanwhile, McGraw-Hill has decided that it does not like all the attention it got for its S&P unit during the downgrade episode. So it announced in September that it would spin out S&P. And that will mean giving up a strong financial performer. After all, S&P - newly dubbed McGraw-Hill Markets will have $4 billion in revenue while the publishing business - McGraw-Hill Education will have only $2.4 billion in revenue.

When McGraw-Hill reported its third quarter results, they disappointed analysts. It $365.6 million in net income was down 3.8% from the year before and it missed by two cents analysts' $1.23 forecast for earnings. Not only that but McGraw-Hill lowered its full-year profit forecast as sales from its textbook division dropped for a fourth quarter in a row, while its credit-ratings revenue fell along with a drop in corporate bond issuance.

So does this mean you should skip McGraw-Hill shares and buy Moody's? Unless you like overpaying, you should skip.

• Moody's: Steady growth, good margins; expensive stock. Moody's sales have increased 13.1% in the past 12 months to $2.3 billion while net income jumped 26% to $618 million – yielding a whopping 27.6% net profit margin. Its PEG of 2.89 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 12.71 and expected earnings growth of 4.4% to $2.60 in 2012.
• McGraw Hill: Slow growth, decent margins; expensive stock. McGraw-Hill's sales have inched up 3.6% in the past 12 months to $6.25 billion while net income jumped 13.4% to $852 million – yielding a 14% net profit margin. Its PEG of 1.23 is high on a P/E of 15.64 and expected earnings growth of 12.7% to $3.20 in 2012.

With the situation in Europe seemingly resolved -- the global ratings businesses of both companies could improve. In that case, McGraw-Hill looks like the least expensive way to invest in a possible business rebound. But I might wait until McGraw Hill Markets is separately traded. Meanwhile, Moody's valuation is too darned high.

Ford Should Drive Your Portfolio

Ford (NYSE: F) managed to ride out the great recession without a government bailout. But General Motors (NYSE: GM) simply could not survive on its own. Nobody knows whether the U.S. will ever get its money back from the GM bailout, but at least the new, publicly-traded version of GM is a more viable business. Should you invest in the car company that survived on its own or the one that the U.S. bailed out?

GM failed for six reasons that serve as a warning for all businesses. As I wrote in 2009, GM took a $19 billion bailout from the U.S. that ended its 101 year existence. And it failed due to six management weaknesses:

• Bad financial policies. By 2006, GM's liabilities exceeded its assets and it was using its vehicles as loss-leaders to issue more profitable car loans;
• Uncompetitive vehicles. Compared to its toughest competitors -- like Toyota Motor Co. (NYSE: TM) -- GM's cars were poorly designed and built, took too long to manufacture at costs that were too high, and as a result, fewer people bought them, leaving GM with excess production capacity.
• Ignoring competition. GM has been ignoring competition -- with a brief interruption (Saturn in the 1980s) -- for about 50 years. At its peak, in 1954, GM controlled 54% of the North American vehicle market. By 2008, that figure had tumbled to 19%.
• Failure to innovate. Since GM was focused on profiting from finance, it did not really care that much about building better vehicles. GM's management failed to adapt GM to changes in customer needs, upstart competitors, and new technologies.
• Managing in the bubble. GM managers got promoted by toeing the CEO's line and ignoring external changes. What looked stupid from the perspective of customer and competitors was smart for those bucking for promotions.

Meanwhile, Ford managed through the same competitive environment in much better shape. Under CEO Alan Mulally, formerly a Boeing (NYSE: BA) executive, Ford borrowed billions that gave it the cash to survive the Great Recession.

But beyond that, Mulally is a great problem-solver. According to Stan Sorscher, a former Boeing employee and current union official I interviewed for an August 2009 story, Mulally would invite people from all levels of the business to share information and work toward solutions that are in the best interests of Boeing.

And before its second quarter financial report on Wednesday, Ford was expected to report EPS of $0.45 per share with revenues seen rising 11.9% to $29.86 billion. Its actual results were a penny higher than expected -- $0.46 while Ford's revenues rose much faster than analysts had forecast -- 14.1%.


Ford is also enjoying the benefits of a successful negotiation with the United Auto Workers and credit rating upgrades. Due to Ford's free cash flow and automotive profits S&P raised its rating while Fitch did the same on Ford's strong financial performance and efforts to reduce debt. Moreover, in September, demand for Ford's fuel-efficient automobiles led to a strong sales report.

For its part, GM reported a great second quarter but its stock fell when it predicted a weaker second half. Specifically, its Q2 2011 net income of $2.52 billion was 90% above the year before and its EPS of $1.54 was 32 cents above the average estimate of 13 analysts surveyed by Bloomberg. GM's 19% sales increase to $39.4 billion was $3 billion higher than estimated.

But the most interesting part of this report was that GM customers are willing to pay higher prices. For example, GM's Cruze is selling for $4,200 more than the Chevrolet Cobalt car that it replaced; the new Buick LaCrosse is fetching $7,000 more than its predecessor and its Chevrolet Equinox sport-utility vehicle gets $3,800 more than it did in 2009.
 
Should you buy GM and Ford stock?

• Ford: Solid growth, decent margins; hard-to-value stock. Ford sales were up 10.9% in the past 12 months to $131 billion while net income jumped 142% to $6.8 billion – yielding a 5.22% net profit margin. Its PEG is undefined (where a PEG of 1.0 is considered fairly priced) because at a P/E of 7.1 its earnings are expected to fall 5.71% to $1.77 in 2012. However, if it can continue its earnings growth at the pace of the last 12 months, the stock is screamingly cheap. 
• GM: Good sales growth, but falling profit and small margins; hard-to-value stock. Revenue for GM was up 29.6% in the past 12 months to $146 billion while net income dropped 95.5% to $7.9 billion – yielding a 4.77% net profit margin. Its PEG is also undefined on a P/E of 5.22 and earnings expected to decline 1.64% to $4.20 in 2012.

Analysts seem convinced that neither Ford nor GM can grow earnings in 2012. But if I was going to gamble, I would say that GM has a better chance of beating expectations based on its higher prices and cost controls.

Stock up at Staples, Not Office Depot

There's no doubt that the U.S. economy is growing slowly -- the question for investors is whether that's a problem that hurts all office supply comapanies equally or whether some are better able to adapt than others.

A case in point is Office Depot (NYSE: ODP) -- report earnings Tuesday and they were to weaker than expected. The office supply retailer is not adapting well to the slow economy. Is Staples (NYSE: SPLS) better positioned?

Office Depot had a poor second quarter report and its third quarter was down from the year before and worse than expected. Specifically, Zacks expected  EPS of 2 cents a share on revenue of $2.9 billion for the third quarter -- it earned 3 cents the year before.

But Tuesday, it reported no profit at all after adjustments. But it used one-time gains to report $101 million in profit on a 2% drop in sales that was aroung $100 million less than expected. Absent one-time items such as a $99 million reversal of "combined tax and interest accruals for uncertain tax positions" in the quarter, Office Depot adjusted EPS was 0.

In the second quarter, Office Depot lost 6 cents a share that was better than the year before's 9 cents a share loss and analysts' estimate 12 cents a share expectation.

But Office Depot missed revenue expectations of $2.73 billion by around $20 million and generated negative free cash flow of $85 million -- around $25 million worse than the year before.

Not surprisingly, Office Depot is responding by taking the usual restructuring steps. It's cutting costs, closing money-losing stores, taking more expensive items out of inventory and closing distribution facilties with operating slack.

But Staples has bucked this negative trend and traders are betting on a big rebound in its stock. For example, Bloomberg reports that its 2011 back-to-school sales were up over 2010 and it has been able to pass higher prices to customers, CEO Ron Sargent also told a September 2011 conference sponsored that he "expects more mergers and acquisitions in the industry."

Staples has been adding electronics and products that appeal to women. For example, Staples sells  Amazon (NASDAQ: AMZN) Kindle digital readers and it partnered with Martha Stewart to offer home office items targeted at women who account for 60% of in-store customers.

And bullish bets on Staples stock are high -- the ratio of bets on a rise in the price, known as calls that give investors the right, but not the obligation to buy shares at a specific price and time -- to bets on the price falling (known as puts) is at 3.01. This is close to the highest level of bullishness on Staples since June 2003.

So should you buy Staples and avoid Office Depot? Yes. here's why:

• Office Depot: Shrinking sales and losing money; very cheap stock. Revenues for Office Depot have dropped 4.2% to $11.5 billion in the past 12 months while net income has climbed 87% -- due to a smaller loss of $121 million. Meanwhile Its Price-Earnings-to-Growth (PEG) ratio is very inexpensive (where a PEG of 1.0 is considered fairly priced) at 0.02 on a forward P/E of 15.9 and expected earnings growth of 1,030% to $0.16 in 2012.
• Staples: Slow sales growth and small margins; but fairly priced stock. Staples sales have inched up 1.1% to $25 billion in the past 12 months while net income has climbed 19.4% to $938 million, creating a slim 3.76% net profit margin. Its PEG of 1.02 is fairly priced on a P/E of 11.61 and expected earnings growth of 11.3% to $1.57 in 2012.

Staples is doing better in an industry that is suffering in the economic doldrums. And it looks like Office Depot is a sitting duck -- possibly resulting in its acquisition by Staples. If that happened, Office Depot's stock would rise. If not, it will keep dropping -- I am not sure those 2012 earnings growth numbers can be achieved -- while Staples could rise if the bulls are right.

Nvidia To Charge Up Your Portfolio, TI Not So Much

Texas Instruments (TXN) is famous for its calculators but when it comes to sales growth, they're spitting out negative numbers. Fortunately for investors interested in chip stocks, Nvidia (NVDA) is growing like gangbusters. Is either company a good place to put your chips?

TI is expected to report a plunge in earnings later Monday. Analysts expect 57 cents a share in EPS, down 20% from the year before. Not only that but analysts are expecting TI's revenues to drop 11% in the quarter to $3.33 billion.

What's behind the drop appears to a problem with TI's business strategy. Unlike more successful companies, TI's CEO resorted to blaming external factors for the sales decline. When TI reported its second quarter results, CEO Rich Templeton cited “mixed macroeconomic and market signals.”

And Templeton claimed that demand was weak. As he said, “We note that production at some computing and consumer manufacturers appears lukewarm even though we’re heading into the back-to-school and holiday seasons.” 

Furthermore, he argued that TI suffered from soft demand in PCs and digital televisions. The good news was that TI enjoyed sales gains in demand for its power management chips.

Of course there is no law that requires TI to continue to depend so heavily on slower growing markets. It could, instead, set its sites on faster growing markets as Nvidia does. When it reported its second quarter results, Nvidia's stock spiked 19% after executives said its revenues would rise between 4% and 6% faster in the third quarter compared to the second one.

Nvidia's second quarter guidance translated into higher-than-expected third quarter sales expectations. Specifically, Nvidia guided analysis several hundred million dollars higher to a range between $1.06 billion and $1.08 billion -- above analysts' average forecast of $1.05 billion.

Not only that, but Nvidia's earnings more than tripled in the second quarter. It reported non-GAAP earnings of $193.5 million -- 304% above the $48 it earned the year before. 

Does this mean you should shun TI and but Nvidia? You might consider both. Here's why: TI's recent results make me wonder whether it can recover in 2012 -- if it does, the stock looks reasonably priced. But Nvidia's P/E seems to reflect investors' concerns that it may not be able to sustain its recent rapid growth. But even if its growth rate slows down in fiscal 2013, the stock still looks cheap.

• Texas Instruments: Strong growth and margins; fairly priced stock. Despite the short term drops, TI's revenues were up a solid 34% to $14.12 billion in the past 12 months while net income was up 119% to $3.1 billion over the same period, which yielded a 22.2% net profit margin. Its PEG of 1.00 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 11.76 and expected earnings growth of 11.7% to $2.51 in 2012.
• Nvidia: Decent growth, fair margins; inexpensive stock. Revenues for Nvidia were up 6.5% to $3.7 billion in the past 12 months while net income shot up 472% to $543 million, yielding a net profit margin of 14.65%. Its PEG of 0.91 (where a PEG of 1.0 is considered fairly priced) is incredibly cheap on a P/E of 15.91 and expected earnings growth of 17.5% to $1.18 in 2012.

TI's recent performance suggests that it may not be able to resume positive earnings growth in 2012. But if the forecast is right, its stock is fairly priced. Nvidia, by contrast, is growing much faster but analysts seem to think its growth will slow down in fiscal 2013. But even if it does, the stock is cheap at its current P/E.

Stock Shop at JC Penney, Pass On Wal-Mart

JC Penney (NYSE: JCP) imported a handful of executives from winning marketers. Can they change its culture and boost earnings growth? Or is Wal-Mart (NYSE: WMT) a safer bet?

In June, JC Penney announced that Ron Johnson, Apple (NASDAQ: AAPL)’s senior vice president of retail would take over as CEO effective November 1. Behind that move was an effort by activist investors -- William Ackman of Pershing Square Capital Management and Steven Roth of Vornado Realty Trust -- who bought 26% and want new management to lift the stock price.

And earlier in October, Johnson announced that he was hiring Michael Francis from Target (NYSE: TGT) -- where he was chief marketing officer -- as president -- putting him in charge of merchandising, marketing and product development. Francis and Johnson worked together at Target until 2000, when Johnson left for Apple.

No doubt, JC Penney shareholders are hoping that new management can improve JC Penney's financial track record -- three straight annual sales declines before a 1.2% gain in its fiscal 2011.

Meanwhile, competitor Wal-Mart, keeps chugging along at a rate of growth that's too slow to excite shareholders who have held its stock in a trading range for the last 11 years after decades of explosive stock market growth.

In its most recent quarter, ending July 31, Wal-Mart reported a 5.7% profit increase to $3.8 billion, or $1.09 a share -- a penny better than expected. Its weak U.S. business overwhelmed its strong international performance.

In short, Wal-Mart has done little to get investors interested in its stock and absent an exit from the sluggish U.S. market and a doubling down in fast-growing markets like China, there is little hope that Wal-Mart's management can make such a huge company revert to its double-digit earnings growth path.

Can importing talent into JC Penney make it faster-growing company or will a bad business defeat talented management? Should you invest in JC Penney and buy Wal-Mart? Consider it. Here's why:

• Walmart: Slow growth, small margins; expensive stock Walmart's revenues are up 3.4% to $432 billion in the past 12 months and net income is up 6.3% to $15.7 billion – producing a thin net profit margin of 3.8%. Its PEG of 1.38 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 12.81 and expected earnings growth of 9.3% to $4.90 in fiscal 2013.
• JC Penney: Decent growth, small margins; cheap stock. JCP's sales are up a meager 1.2% to $17.74 billion in the past 12 months though net income is up 51.8% to $382 million – yielding a small net profit margin of 2.2%. Its PEG of 0.46 (where a PEG of 1.0 is considered fairly priced) is cheap on a P/E of 19.59 and expected earnings loss of 42.9% to $2.09 in 2013.

William Ackman had a failed effort to get an investment in Target to pay off. He appears to be tryung to vindicate himself with JC Penney. Wall Street seems to think that its earnings will grow fast int he first year after Johnson takes over -- but with its low PEG, many investors are taking a wait and see attitude. This could be a buying opportunity.

Meanwhile, Wal-Mart stock is a bit expensive and it looks like the stock has little chance of reviving unless the U.S. consumer comes back to life.

Post-Jobs Intel's a Better Bet Than Apple

Wednesday CNBC featured a debate on whether investors should switch from Apple (NASDAQ: AAPL) -- its shares are up 24% in 2011 -- to Intel (NASDAQ: INTC) (+15%). The argument in favor of the switch is that Apple missed its numbers in the latest quarter while Intel steadily beats them. Is that a good enough reason to dump Apple and buy Intel?

Apple's Wednesday earnings report for its fourth quarter was Apple's first earnings miss in 26 quarters. The good news was that its profit of $6.62 billion was still 54% higher than the year before. Nevertheless, Apple's EPS of $7.05 was 26 cents a share below analysts' expectations, according to Bloomberg.

The cause of the earnings disappointment was a shortfall in iPhone sales. Apple sold 17.07 million iPhones -- it accounts for 39% of Apple's revenues -- about 17% less than the 20 million projected by analysts surveyed by Bloomberg. The explanation for this is that consumers were waiting for the iPhone 4S that was released after the September 24th close of the quarter.

But Apple softened the blow by announcing that its first quarter (ends in December) EPS will be an expectations-beating $9.30 on sales of about $37 billion.

Meanwhile, analysts treated Intel management with respect when it reported earnings that beat expectations by 7%. Specifically, Intel reported EPS of 65 cents that was four cents ahead of expectations; its net income of $3.5 billion was 17% above the year before; and its revenue of $14.3 billion was up 29% from the year before.

Not only did Intel beat, but its forecast for the current quarter of $14.7 billion is nearly $500 million higher than analysts expected.

But it's not all good news for the company. Intel controls 80% of the central processing unit chips that go into personal computers, but it has yet to gain traction among handheld devices. And a decline in so-called netbook PCs in favor of tablets is hurting Intel -- sales of its Atom chips that go into netbooks fell 32% in the quarter. 

Nevertheless, Intel believes that when Microsoft (NASDAQ: MSFT) releases its Windows 8, PC sales will rise and boost Intel's business.

And it looks like those predicting the imminent demise of PCs may be off base. Gartner (NASDAQ: IT) predicted last month that 364 million PCs would be sold in 2011 and that number would grow 10.9% in 2012. Monday, Gartner predicted that tablet sales -- they're now a mere 15% of PC sales -- would rise from 20 million in 2010 to 900 million by 2016 -- a whopping 88.5% compound annual growth rate.

So does this mean you should sell your Apple shares and pile into Intel? It's hard to tell.

• Apple: Strong growth and margins; fairly priced stock. Apple's revenues have climbed 66% to $108 billion in the past 12 months while net income has jumped 85% to $26 billion – yielding a healthy net profit margin of about 24%. Its PEG of 1.06 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 14.4 and expected earnings growth of 13.6% to $38.05 in fiscal 2013.
• Intel: Big growth and healthy margins; expensive stock. Revenue for Intel has increased 24% to $51.6 billion while net income surged 162% to $12.8 billion – yielding a nearly 25% net profit margin. However, its PEG of 2.38 is quite expensive on a P/E of 10 and expected earnings growth of 4.2% to $2.51 in 2012.

Based on PEG, it looks like Apple would be less expensive compared to its earnings growth. But the earnings growth rates for both of these companies are so much slower than their recent performance that the potential for upside surprise is great. If Gartner is right that PCs will grow almost 11% in 2012, then Intel should grow at least that much. And with growth expectations so low, odds of beating them are strong.

I'd favor Intel over Apple.

IBM and VMWare Looking Expensive

Monday, IBM (NYSE: IBM) reported better-than-expected earnings and raised its guidance for the rest of 2011. With deference to its former CEO, Lou Gerstner, his successor is proving that elephants still can dance. But a big technology company has trouble growing very fast -- perhaps you should consider VMWare (NASDAQ: VMW) instead.

IBM's earnings grew and it beat expectations. Its net income rose 7% to $3.84 billion and it reported a 15% increase in EPS to $3.28 a share -- six cents higher than expected.

Two big factors are driving IBM's growth -- emerging market demand and new products. Countries like China, India, Brazil and a few dozen other emerging nations contributed to 19% growth and now represent nearly a quarter of  IBM sales.

Customers are also buying new products from IBM such as business analytics -- a tool that let companies find the needle in the haystack of corporate data to pinpoint sales opportunities and cut operating costs.

Meanwhile VMWare -- it provides so-called virtualization software that boosts the performance of corporate data storage systems and provides a way for corporations to operate in the so-called cloud -- is growing very rapidly. Tuesday after the market closed, VMWare reported a 146% rise in net income to $178 million while adjusted EPS of 53 cents beat by three cents the Thomson Reuters analysts' earnings projection for the quarter.

VMware's 32% revenue increase to $949 million is due to two factors: rising corporate IT spending and higher revenue per customer. Recently, for example, major VMWare customers have signed more early license renewals and bought more add-on products. And VMWare is boosting guidance for the fourth quarter -- to a range between $1.03 billion and $1.06 billion -- ahead of Wall Street's expected $1.03 billion.

Does this mean that you should invest in both IBM and VMWare? I'd be reluctant to invest in either company. How so?

• IBM: growing and profitable; with pricey stock. Revenues for IBM have grown 4.3% in the last 12 months to $106 billion while net income has jumped 10.5% to $15.6 billion --- earning a substantial 14.7% net profit margin. In addition, its price/earnings to growth ratio of 1.48 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 15.2 and expected earnings growth of 10.3% to $14.76 in 2012.
• VMWare: rapid growth, profitable; but expensive stock. VMWare 's revenues are up 41% in the last 12 months to $3.5 billion while net income jumped 81% to $643 million --- yielding a net profit margin of 18.4%. Its PEG is a pricey 1.92 on a P/E of 46 and expected earnings growth of 24% to $1.79 in 2012.

If forced to choose one of these stocks, I'd go with VMWare because based on its recent performance -- e.g., 81% earnings growth, there is a some chance that its 2012 earnings growth forecast could prove to be way too low. If VMWare keeps growing at that rate, its P/E will look low to investors.

IBM, on the other hand, is highly unlikely to be able to sustain earnings growth faster than the 15% that would be required to make its stock look reasonably priced. IBM's financial performance is impressive given its size.

Despite this, investors have driven up IBM 35% in the last year to VMWare's 18%. Thus a decision on whether to invest in either company depends more on what happens in the future than on what they've done in the past.

Invest in Wells Fargo, Pause on Citigroup

Banking has not exactly been a great investment -- especially since September 2008 when Lehman Brothers kicked the bucket. In 2011, bank stocks have declined an average of 27%. As rumors of 100,000 Wall Street layoffs surface, Wells Fargo (NYSE: WFC) -- it's trying out a $3 a month debit card fee to boost revenue -- and Citigroup (NYSE: C) just reported earnings for the third quarter. But should you invest in either bank?

Prior to their scheduled reporting time of 8 AM Monday, the two banks were expected to report double digit earnings growth compared to the year before thanks largely to lower charges for bad loans. Analysts expected Wells Fargo to report an 18% rise in net income to $3.9 billion while analysts saw Citigroup as poised to report a 15% rise to $2.5 billion, according to Bloomberg.

In fact, both banks reported better than expected numbers. Thanks to improvements in its lending and deposit division and its absence from the volatile investment banking business, Wells Fargo earned a $200-million-higher-than-expected $4.1 billion profit in the third quarter profit. Its EPS of 72 cents a -share matched analysts’ estimates according to DealBook.

These numbers reflect the benefits to the banks of combining so-called commercial and investment banking. Commercial banking is the business of taking insured deposits and lending them to businesses and consumers. Investment banking uses overnight loans from other banks to finance corporate issuance of debt and equity and pay advisors who help companies with mergers.

Citigroup also beat expectations. Its 74% rise in net income, to $3.8 billion, was much better than expected. Moreover, its $1.23 EPS for the third quarter was 36% higher than the 81 cents a share analysts’ consensus, according to DealBook.  But there may be less here than meets the eye – after all, about a third of Citigroup’s pre-tax operating profit came from a $2 billion paper gain – that weirdly reflects “a sharp increase in the perceived riskiness of its debt.” And that gain helped offset weak trading results and big mortgage losses.

In 2011, the investment banking business -- Citigroup is a big player here -- has been relatively quiet thanks to turbulence in the financial markets. By contrast, commercial banking has been growing, albeit slowly. For example, International Strategy & Investment Group reported that in the third quarter, loan growth inched up 1.2% among the top 25 U.S. banks due to a rise in commercial and residential loans while the deposits to fuel those loans climbed 6.8%.

Does this mean that you should avoid Citigroup and invest in Wells Fargo stock instead?

• Wells Fargo: Shrinking, but still fairly profitable; very cheap stock. Revenues for Wells Fargo have dropped 6.2% in the last 12 months to $51 billion while net income has jumped 46% to $13.7 billion --- earning a fairly large 17.8% net profit margin. In addition, its price/earnings to growth ratio of 0.58 (where a PEG of 1.0 is considered fairly priced) is very cheap on a P/E of 10.34 and expected earnings growth of 17.8% to $3.30 in 2012.
• Citigroup: Decent growth, profitable, and a cheap stock to boot. Citigroup's revenues are up 3.8% in the last 12 months to $74.9 billion while net income jumped 220% to $9.8 billion --- yielding a net profit margin of 13%. Its PEG is a very cheap 0.43 on a P/E of 8.79 and expected earnings growth of 20.4% to $4.61 in 2012.

Banking stocks are widely hated by investors. But if these earnings forecasts prove accurate, both stocks look like bargains. I’d favor Wells Fargo over Citigroup because I am not optimistic about a recovery in investment banking. But if you see such a recovery around the corner, both stocks look good.

Safeway, Whole Foods Not the Safest Routes to Riches

Thursday Safeway (NYSE: SWY) --  operator of supermarket brands like Vons, Randalls, Tom Thumb, Genuardi's and Carrs -- reported a rise in earnings but expects weak results due to the moribund U.S. economy. This suggests that if you're shopping for supermarket equities, you might be better off buying in the premium aisle where the well-off shop. Does that mean you should invest in Whole Foods (NASDAQ: WFM) instead?

Despite the gloomy outlook, Safeway beat expectations. Safeway reported $130.2 million in net income, up 6% from the year before while its 38 cents a share EPS beat expectations by three cents. And Safeway revenues climbed 7.1% to $10.06 billion, 2% higher than analysts polled by Thomson Reuters had forecast.

Safeway CEO Steve Burd told Dow Jones Newswires that high income consumers are spending as much as ever but most shoppers remain very price conscious -- a trend that Burd expects will continue for the next year. Nevertheless, Burd noted that Safeway's same-store-sales rose 2% during the most recent six weeks.

Whole Foods is doing way better than Safeway. When it last reported earnings for its second quarter in July, Whole Foods reported a 35% jump in earnings and raised its forecast for the rest of 2011. Its $88.5 million in second quarter earnings were up 35%; its revenues climbed 11% to $2.4 billion and its EPS of 50 cents per share were three cents better than expected.

What's behind the better than industry average performance at Whole Foods? It has revamped its product line so people perceive its prices as being lower. While that move may have drawn consumer back to its stores, Whole Foods' affluent customers appear willing to pay the higher prices its is charging to hold its profit margins as its cost of goods sold goes up. Demand is so high that Whole Foods is adding to its 309 stores in the U.S., U.K. and Canada.

So does this mean you should shun Safeway stock and invest in Whole Foods? I'd avoid them both. Here's why:

• Whole Foods: fast growing, decently profitable company; expensive stock. Whole Foods revenues increased 12.1% to $9.9 billion in the last year while its net income soared 102% to $325 million yielding a slim 3.3% net profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a pricey 2.17 with a P/E of 36.8 on earnings forecast to grow 17% to $2.25 in fiscal 2012.
• Safeway : barely growing, thinly profitable company, pricey stock. Safeway revenues are up 0.5% in the last year to $42.8 billion and its net income soared 154% to $531 million while it earned a slimmer 1.2% net profit margin. And its PEG is an over-valued 1.35 on a P/E of 12.6 with earnings forecast to grow 9.3% to $1.85 in 2012.

Even if Whole Foods maintained a 35% earnings growth rate, it would still not be a bargain at its current P/E. And Safeway's slim margins and slow growth make it hard to like --even with single-digit P/E.

Occupy JPMorgan Chase, Skip Goldman Sachs

The Occupy Wall Street idea -- living on the streets of cities large and small while carrying signs -- is going viral. Not only are the protesters fed up with Wall Street -- so are shareholders and employees who are either poised to lose their jobs or to get lousy bonuses. With  JPMorgan Chase (NYSE: JPM) posting less-disappointing-than-expected earnings Thursday, is the house of Dimon a better investment than Goldman Sachs (NYSE: GS)?

JPMorgan reported a 4% drop in earnings for the third quarter of 2011 -- much better than the 10% drop analysts had expected. JPMorgan blamed that 10% predicted drop -- the biggest in more than two years -- on Europe’s credit crisis and the U.S. debt- ceiling debate that it believes spoiled optimism for an economic recovery, according to Bloomberg.

As OWS protesters visited his Park Avenue apartment, JPMorgan CEO was considering the business challenges facing the bank, including:

• 30% lower trading revenue compared to the second quarter of 2011;
• 50% less investment banking revenue due to a drop from $2 trillion in corporate bond issues in the first half of 2011 to $550 billion in the third quarter;
• A 10% drop to $3.96 billion in third quarter earnings estimated by 18 analysts surveyed by Bloomberg.

However, Dimon announced a higher-than-expected profit of $4.26 billion, or $1.02 a share Thursday morning -- a dime a share above expectations. But JPMorgan revenue fell 11% to $24.4 billion as a result of a drop in corporate securities issuance, difficult trading conditions, narrower profit margins and the elimination of overdraft and other penalty fees, according to DealBook.

Meanwhile, Goldman Sachs -- scheduled to report its third quarter results next week -- has suffered from a drop in trading business and said in July that it would cut about 1,000 jobs after its second-quarter drop in trading revenue was bigger than analysts estimated. And Goldman's third quarter report is expected to be its worst quarterly results since 2008 in the depths of the financial crisis.

Does this mean you should buy JPMorgan and avoid Goldman Sachs? Yes. Here's why:

• JPMorgan: shrinking, highly profitable company; cheap stock. JPMorgan revenues fell 3.9% to $62.3 billion in the last year while its net income soared 81% to $18.6 billion yielding a whopping 30% net profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a cheap 0.55 with a P/E of 7.1 on earnings forecast to grow 13% to $5.18 in 2012.
• Goldman Sachs: shrinking, moderately profitable company, dirt cheap stock. Goldman Sachs revenues are down 11% in the last year to $44.2 billion and its net income tumbled 36.7% to $5.92 billion while it earned a slimmer 13.4% net profit margin. And its PEG is very inexpensive 0.10 on a P/E of 9.8 with earnings forecast to grow 103% to $14.76 in 2012.

JPMorgan's up and down swings are less pronounced than Goldman -- that depends so heavily on trading for its profits.

If you're looking for a less risky bet, JPMorgan is your stock. If you like to swing for the fences, it might be wise to wait until after Goldman stock drops even further so you can get the biggest return on a gamble on a possible 2012 rebound.

Allstate Can Insure Your Net Worth If Growth Spikes

Progressive (NYSE: PGR) is a highly innovative insurance company -- for example, about a decade ago, it empowered claims adjusters to issue checks to policyholders at an accident scene. And its CEO, Peter Lewis, is famous, among other things, for being a supporter of legalizing marijuana.

And with its most recent earnings falling short of expectations, perhaps he should focus a bit more on business. Does this mean you would be better off investing in its more conservative peer, Allstate (NYSE: ALL)?

Progressive missed expectations by a mile in the previous quarter. Specifically, it reported EPS of $0.35 a share -- a whopping 12.5% below expectations.

And for the latest quarter, analysts were expecting Progressive to report bad news. But its actual report Wednesday morning was even worse than they had expected. Specifically analysts were looking for EPS of $0.29 a share on sales of $3.9 billion -- that expected EPS was 21.6% below its 2010 actual level while the revenue figure was $100 million higher than the year before.

But its actual earnings report was a bigger-than-expected 42% below 2010 on investment losses and higher catastrophe losses. Progressive reported a profit of $0.24 a share -- a nickel less than expected. And its net realized investment losses of $52.6 million compared unfavorably to its prior year's $26.9 million worth of investment gains.

The causes of Progressive's disappointing results were quite predictable. That's because in its most recent report before Wednesday -- an unusual monthly earnings report for August 2011 --Progressive's net income fell 66% on a one-two punch of a $35.7 million loss on securities -- over twice the loss in the previous year -- and a $37 million loss due mostly to Hurricane Irene.

Meanwhile, Allstate is taking some aggressive steps to broaden its service offerings. On October 7, it closed a $1 billion worth of acquisitions to acquire Esurance and Answer Financial from White Mountain Insurance.

Allstate expects this deal to broaden its appeal to different groups of customers -- self-directed business and consumer insurance buyers. How so? According to Allstate, "Esurance provides the business platform to serve the self-directed, brand-sensitive market segment. Answer Financial strengthens our offering to self-directed consumers who want a choice between insurance carriers."

Does this mean you should buy Allstate and avoid Progressive?

• Progressive: barely growing, profitable company; somewhat over-priced stock. Progressive revenues inched up 2.7% to $15.4 billion in the last year while its net income rose 1% to $1.2 billion yielding a solid 7.8% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a slightly pricey 1.27 with a P/E of 10.3 on earnings forecast to grow 8.1% to $1.60 in 2012.
• Allstate: shrinking, barely profitable company, dirt cheap stock. Allstate revenues are down 1.9% in the last year to $32.2 billion and its net income rose 8.7% to $562 million while it earned a slim 1.7% net profit margin. And its PEG is very inexpensive 0.08 on a P/E of 23.4 with earnings forecast to grow 292% to $3.70 in 2012.

Like insurance, investment is all about weighing risks and returns. And if you believe that Allstate can rebound so much in 2012, its stock is a screaming buy. Meanwhile, Progressive looks a bit pricey and an 8.1% growth rate would be much higher than its recent earnings growth record. I'd wait on buying its stock.

Take a Swig of Coke Stock on Next Market Swoon

PepsiCo (NYSE: PEP) was expected to report double-digit revenue growth Wednesday morning. But is that good enough to justify an investment or would your portfolio prefer Coca Cola (NYSE: KO)?

Analysts were expecting Pepsi to report EPS of $1.30 per share on revenue of $17.28 billion -- 11.4% higher than the year before. Moreover, there is a hint that Pepsi will report slower growth in North America than in emerging markets.

That's because, according to SeekingAlpha, PepsiCo CFO Hugh Johnston recently told a Barclay’s Back to School Conference that emerging markets generate over 30% of its total revenue -- partially offsetting "losses in North America and Europe."

And there are certainly risks to PepsiCo's business that are worth considering. For example, its stock has fallen over the last few months due to investor concerns about the outlook for the global economy and emerging markets, a strong dollar that would make it less competitive in global markets, increased competition, and higher prices for corn -- a key ingredient in many of its products.

Coke also faces headwinds. Bloomberg cited one analyst that lowered earnings estimates on the company. For the third quarter, a JPMorgan analyst lowered his EPS estimate 3% from $1.03 to $1.00; for 2011, he reduced it 1.5% from $3.86 to $3.80 and for 2012, he cut 4% from $4.23 to $4.06. While the analyst thinks Coke's fundamentals and growth potential rank high with peers, he thinks that foreign exchange and interest income changes will hurt future earnings.

The JPMorgan analyst thinks that Coke stock has had too good of a rise. Coke has gained almost 40 percent since July 2010 and that it's now over-priced. He lowered his 2012 target for the stock from $80 to $76.

Should you avoid Pepsi and Coke?

• Pepsi: growing, profitable company; over-priced stock. Pepsi revenues spiked 33.8% to $62.4 billion in the last year while its net income rose 6.3% to $6.3 billion yielding a wide 10.2% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is an over-valued 2.09 with a P/E of 15.7 on earnings forecast to grow 7.5% to $4.74 in 2012.
• Coke: growing, profitable company, slightly over-priced stock. Coke revenues are up 13.3% in the last year to $32.2 billion and its net income spiked 73% to $12.5 billion while it earned a whopping 29.8% net profit margin. And its PEG is reasonable 1.28 on a P/E of 12.5 with earnings forecast to grow 9.8% to $4.23 in 2012.

Coke looks like a much better bet than Pepsi. However, given concerns about its upcoming earnings, I would be inclined to wait until another market crunch to pick up Coke stock at a lower price.

Kaiser Aluminum Can Help Construct Your Portfolio, Not Alcoa

Alcoa (NYSE: AA) is generally the first big company to kick off the quarterly earnings season. And with expectations tepid for its third quarter report on Tuesday, should you invest in Alcoa or is Kaiser Aluminum (NASDAQ: KALU) a better bet on the sector?

Alcoa is expected to report a 28% plunge in its earning per share (EPS) from 2010's third quarter. This means that if Alcoa can do better than the 23 cents a share that 11 analysts on average are forecasting, Alcoa stock will pop after it announces its earnings -- especially if Alcoa raises its revenue and profit forecast.

Why is Alcoa profit expected to plunge? Concern about the slowing economy has slashed aluminum prices 19% this year. And Alcoa stock has fallen 46% since April -- more than twice the 22% plunge in the S&P 500's materials index, according to Bloomberg.

Meanwhile, analysts' estimates for Alcoa's third quarter have contracted 41% from 37 cents a share in July as bets on Alcoa's stock decline -- in the form of put options -- have increased in value. Alcoa put options priced 10% below the share price rose to 7.61 points above calls to buy the stock on Oct. 4 -- the biggest gap in the price relationship (called the skew) since April 2009, according to Bloomberg.

But news in the sector is not all bad. That's because despite a drop in its second quarter earnings, Kaiser Aluminum beat expectations substantially in that quarter. Specifically, Kaiser reported second quarter 2011 EPS of 63 cents a share that were down 11% from the year before although 18.8% better than expected.
The good news for Kaiser is what it perceived as demand from its aerospace customers. As Kaiser said in its second quarter 2011 earnings announcement, the company is benefiting from a "strong aerospace order book and [is] well positioned to meet the growing demand with previous investments in plate capacity and with the recently announced expansion of [its] Kaiser Alexco aerospace extrusion facility."
So should you shun Alcoa and buy Kaiser? You should consider doing just that. Here's why:

• Kaiser: growing, barely profitable company; cheap stock. Kaiser revenues were up 9.3% to $1.2 billion in the last year while its net income fell 80% to $21 million yielding slim 1.8% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a cheap 0.92 with a P/E of 39.8 on earnings forecast to grow 43.1% to $3.41 in 2012.
• Alcoa: growing, profitable company, fairly priced stock.  Alcoa's revenues are up 14% in the last year to $23.5 billion and its net income rose 127% to $950 million while it earned decent 4% net profit margin. And its PEG is reasonable 0.95 on a P/E of 11.2 with earnings forecast to grow 11.8% to $1.19 in 2012.

Kaiser looks cheap and well-positioned to grow along with aerospace demand. Although I would like to see wider profit margins, the company has beaten expectations substantially in recent reports -- boding well for the stock if that trend persists.

Alcoa also looks good if the 2012 earnings forecast is right -- but the wide skew suggests that Wall Street knows some bad news.

Pour Yourself a Glass of Constellation Brands

Should You Satisfy Your Thirst for Investment Profit With Constellation Brands (NYSE: STZ), Molson Coors (NYSE TAP), or Brown Forman (NYSE: BF.B)

Thursday morning, wine and spirits maker Constellation -- it sells brands such as Robert Mondavi, Svedka and Corona --  is poised to report 65 cents a share, up 51% from 2010. Constellation has spent the last five years cutting costs and selling brands that don't fit the "premium-category" wines priced from $5 to $20 a bottle where it wants to cement its lead. During that time it has reduced its debt from $5.3 billion to $3 billion and cut 5,100 employees to a slimmer payroll of 4,300.

Molson Coors does not look to be in such market-beatingly good shape. Its second quarter profit of $1.23, reported on August 2, fell 4.65% below analysts' expectations. And in the last month analysts cut their Molson Coors EPS projections for 2011 -- by 3 cents to $3.55 a share -- and by 7 cents $3.74 a share for 2012.

Brown Forman, maker of premium brands, such as Jack Daniel's, Finlandia, Southern Comfort and Canadian Mist, is doing much better. Brown Forman's adjusted EPS grew 7% in to 81 cents a share in the first quarter of fiscal 2012 on 12.8% revenue growth due to its strong performance in the international market.

So should you buy Brown Forman and avoid the other two? No -- avoid Brown Forman and Molson Coors and consider investing in Constellation. Here's why:

• Constellation: shrinking, profitable company; fairly valued stock. Constellation revenues fell 1% to $3.2 billion in the last year while its net income popped 463% to $485 million yielding a very wide 15.1% profit margin. And its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is reasonable at 1.00 with a P/E of 6.8 on earnings forecast to grow 6.8% to $2.08 in fiscal 2013.
• Molson Coors: growing, highly profitable company, over-priced stock. Molson Coors revenues are up 7.3% in the last year to $3.3 billion and its net income fell 8.4% to $675 million while it earned an impressive 20.3% net profit margin. But its PEG is an exorbitant 2.09 on a P/E of 11.1 with earnings forecast to grow 5.3% to $3.74 in 2012.
• Brown Forman: growing, profitable company, over-priced priced stock. Brown Forman  revenues are up 5.5% in the last year to $3.5 billion and its net income rose 27.5% to $578 million while it earned a solid 16.5% net profit margin. And its PEG is an over-valued 1.98 on a P/E of 17.8 with earnings forecast to grow 9% to $4.01 in fiscal 2013.

Constellation is the winner in this bunch. Its refocusing is producing profit growth that's likely to exceed its current low valuation. Molson Coors and Brown Forman are solid performers that investors love too much.

Costco Wholesale (NYSE: COST) is on a roll and Wednesday it report a strong quarter -- but not as strong as expected. Would you be better off buying stock in Family Dollar (NYSE: FDO) or Target (NYSE: TGT)?

Costco missed the target Wall Street expected it to hit. Instead of posting Wall Street's expected 13% increase in fourth quarter profit on $27.6 billion in revenue, Costco fell short in reporting $1.08 a share, that was two cents less than expected and an 11% increase.

That's still a strong increase and it happened because with the economy weak, people are willing to pay its membership fee to get access to the bargains in its stores. And its growth has been helped by opening stores in the U.S. and internationally.

And Costco is not sitting still. It announced Wednesday that it would raise the fees it charges its members --  by $5 for U.S. individual and business members and Canada business members beginning November 1. This move is likely boost its revenues, unless people decide that the increase is too high leading to a drop in Costco's membership count.

Family Dollar reported an 8% increase in its fourth quarter profit reported September 28. Since consumers are looking for bargains, Family Dollar plans to open more stores than it closes in the next year.  It will add between 450 and 500 new stores in its current fiscal year while closing up to 100 poorly performing locations. In the year ahead, it's looking for an 8% to 10% sales increase.

The key to Family Dollar's growth is that its selection appeals to people who are being stung by the weak economy.  Its merchandise falls into four categories: consumables, home products, apparel and accessories, and seasonal and electronics. And it sells those products at prices ranging from ––under $1 to $10.

But it's not just the lowest-priced retailers that are doing well. Target had a strong second quarter report in August. Its profit of $704 million was 3.6% higher than the previous year whiles its sales rose 5.1%. And Target beat analysts' expectations of $0.97 a share by six cents.

So should you shun Costco for missing its numbers and buy Family Dollar and Target? No -- consider Family Dollar, shun the others. Here's why:

• Costco: growing,barely profitable company; over-priced stock. Costco revenues were up 8.1% to $85 billion in the last year while its net income popped 20% to $1.4 billion yielding slim 1.6% profit margin. And its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a an over-valued 1.68 with a P/E of 25.6 on earnings forecast to grow 15.2.% to $3.82 in 2012.
• Family Dollar: growing, profitable company, fairly priced stock. Family Dollars revenues are up 8.7% in the last year to $8.6 billion and its net income rose 8.5% to $388 million while it earned decent 4.5% net profit margin. And its PEG is reasonable 1.08 on a P/E of 16.5 on earnings forecast to grow 15.3% to $4.19 in 2012.
• Target: slowly growing, profitable company, way over-priced priced stock. Target revenues are up 3.1% in the last year to $68 billion and its net income exploded 17.4% to $3 billion while it earned a solid 4.4% net profit margin. And its PEG is grossly over-valued 8.65 on a P/E of 22.5 on earnings forecast to grow 2.6% to $4.32 in fiscal 2013.

Family Dollar looks cheap and well-positioned to capitalize on continued economic weakness.

Yum, Chipotle, and Dominos Could Give Your Portfolio Indigestion

Fast food companies are doing well -- thanks to global growth and popular store concepts. But we'll know just how well they're doing when YUM! Brands (NYSE: YUM) reports its results Tuesday after the market closes. But YUM is not the only one out there -- for example, there's Chipotle Mexican Grill (NYSE: CMG) and Dominos (NYSE: DPZ) – will any of these companies fatten your net worth?

Yum is a tale of two regions -- a slumping U.S. and a booming China and rest of the world. Yum operates 38,000 restaurants globally. Among the brands of the former PepsiCo (NYSE: PEP) restaurant division are Taco Bell, Pizza Hut, and KFC. But thanks to growth overseas, Yum is expected to report higher revenue and profit in its third-quarter report.

Almost 75% of Yum's operating profit comes from China and other foreign countries -- even though they account for a relatively meager 50% of its total restaurant count. But one of the downsides of the growth in China is the risk that inflation -- in the form of higher labor and commodity costs -- will take a bite out of Yum's profits. 

Meanwhile, Yum's U.S. operations are flagging. In the second quarter, its operating profit there fell 28% in all three of its core brands. Its biggest problem has been with Taco Bell that accounts for 60% of its U.S. profit. And Yum blames a lawsuit regarding claims of insufficient beef in its tacos for a sales drop at Taco Bell.

FactSet-polled analysts expect Yum to report 82 cents a share of adjusted earnings on $3.08 billion in revenue -- that would be an EPS increase of 12.3% and a revenue rise of 73 cents per share on revenue of 7.1% compared to the third quarter of 2010.

Would that be enough to justify an investment in Yum? Should you buy Chipotle or Dominos instead? I would skip them all for now since they are too expensive when compared to their earnings growth. Here's my reasoning:

• Yum: growing, profitable company; over-priced stock. Yum revenues were up 4.7% to $11.7 billion in the last year while its net income grew 8.1% to $1.2 billion yielding a solid 10.3% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a slightly over-valued 1.61 on a P/E of 19.5 on earnings forecast to grow 12.1% to $3.19 in 2012.
• Chipotle: rapidly growing, highly profitable company; over-priced stock. Chipotle revenues are up 21% in the last year to $2 billion and its net income climbed 41% to $192 million while it earned a solid 9.6% net profit margin. And its PEG is a high 1.77 on a P/E of 48.4 on earnings forecast to grow 27.3% to $8.67 in 2012.
• Dominos: growing, decently profitable company, pricey stock. Dominos revenues are up 11.9% in the last year to $1.6 billion and its net income exploded 10.2% to $93 million while it earned a slim 5.8% net profit margin. And its PEG is a high 2.05 with a P/E of 26.5 on earnings forecast to grow 12.9% to $1.83 in 2012.

The market is over-estimating the growth prospects for these fast food purveyors. They could give your portfolio indigestion.

Line Your Portfolio With Crocs, Wolverine Shares

The U.S. economy may not be in the greatest shape but a pair of shoe companies are rocking and rolling. Monday Wolverine Worldwide (NYSE: WWW) announced an 18% profit increase and weeks ago Crocs (NYSE: CROX) launched a line of shoes with Tiger Woods' former golf coach. Should you invest in these two shoe makers?

As I wrote in July, after riding a wave of popularity a few years ago, Crocs hit the skids -- with its stock bottoming out in 2009. But since then, it has reinvented itself and is enjoying spectacular global demand growth.

Two weeks ago, Crocs announced a line of golf shoes designed by Tiger Woods' former golf coach, Hank Haney, who has coached hundreds of golfers for tournaments around the world. The new shoes for men and women will be launched next year and they're intended to be worn on and off the course. These Crocs shoes are probably destined to add to the company's revenue momentum.

But Crocs is not the only shoe company on a roll. Wolverine -- maker of casual shoes, rugged outdoor and work footwear -- boosted its sales and profit forecast and reported an 18% boost in its third-quarter profit. Thanks to growth in its outdoor, lifestyle and consumer direct businesses, Wolverine's revenues rose 13% to $362 million while its net income climbed to $34 million. Its 82 cents a share in earnings were seven cents ahead of expectations.

And Wolverine is confident about the future. It raised the lower end of its EPS forecast by six cents from a range between $2.40 and $2.50 to a higher range from $2.46 to $2.52 a share. The company also boosted its revenue expectations for 2011 to between $1.4 billion and $1.43 billion.

Does all this good shoe news mean it's time to buy these stocks? Maybe on Wolverine, yes on Crocs. Here's why:

• Wolverine: rapidly growing, profitable company; somewhat over-priced stock. Wolverine revenues were up 13% to $1.35 billion in the last year while its net income popped 69% to $118 million yielding an 8.9% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a slightly over-valued 1.22 on a P/E of 13.7 on earnings forecast to grow 11.2% to $2.77 in 2012. If Wolverine sustains its recent 18% growth; however, the stock is cheap.
• Crocs: rapidly growing, highly profitable company, fairly priced stock. Crocs revenues are up 22% in the last year to $917 million and its net income exploded 259% to $105 million while it earned an impressive 11.6% net profit margin. And its PEG is reasonable 1.05 on a P/E of 20 on earnings forecast to grow 19% to $1.65 in 2012 after growing 82% in 2011.

Crocs has higher margins than Wolverine and its odds of beating growth forecasts look strong given its new products and its recent track record of beating expectations. But Wolverine could also provide upside surprise. Consider buying both -- taking advantage of Greece-driven dips to pick up the stocks at even lower prices.